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Chapter 9

With Michigan Gov. Rick Snyder scheduled to testify next Monday in the Detroit bankruptcy trial, there is a great deal of speculation regarding what he might say.

The issue being debated, of course, is whether the city is entitled to court protection from its creditors under Chapter 9 of the U.S. Bankruptcy Code.

Despite what we see in movies and television, and read in legal procedurals, very little new information ever surfaces in a trial. Moreover, given that the governor will appear well prepared and rehearsed, it is likely we will hear a recitation of the key messages that underlie his approval of the process.

And his position is clear. “It is clear that the financial emergency in Detroit cannot be addressed outside of such a filing, and it is the only reasonable alternative that is available,” he wrote back in July in support of the move. “The city’s financial emergency cannot be satisfactorily rectified in a reasonable period of time absent this filing.”

In his letter, which approved emergency manager Kevyn D. Orr’s recommendation that the city file, Gov. Snyder supported his position with four distinct, but interlocking, messages. The messages and key support points are listed below. They probably will drive his testimony on Monday.

Inability to meet obligations to its citizens.

Within this category, expect to governor to term Detroit’s woes as “unique,” and to say that services can’t be cut … and that revenue needs to rise to provide more service. Simple, right, just cut spending? Gov. Snyder probably will cite the following to demonstrate that’s not possible.

• Detroiters wait an average of 58 minutes for police to respond to a call, compared with the national average of 11 minutes.
• Only 8.7 percent of cases are solved, compared with a Michigan-wide average of nearly 31 percent.
• Just one-third of the city’s ambulances were in service in the first quarter of the year.
• Some 40 percent of the city’s streetlights didn’t function in the quarter.
• There are nearly 80,000 abandoned structures in the city.

Inability to meet obligations to its creditors.

It already has been widely reported that Detroit has more than $18 billion in accrued debt. The governor certainly will repeat that number numerous times. He also will tell the court the following: The city’s tax rates are at their current legal limit and that — even if it could legally increase taxes — Detroiters obviously could not pay more. So, we also can expect him to sum it up by noting that Detroit, even with the highest tax rate in the state, has been unable to meet its basic obligations.

Failure to meet obligations to citizens creates failure to meet obligations to creditors.

This is the linkage point, and Gov. Snyder likely will point out that the city’s inability to serve its citizens has in turn led to a 63 percent decline in population – with a 28 percent decline since 2000. And, for those in the court who might not be following, he will point out that a lack of services causes a decline in population, which causes a decreasing tax base, which causes the need for bankruptcy protection. Linkage. And he will state what should be obvious: The city is stuck in the middle. It cannot save money by reducing services and it cannot raise money through higher taxes.

Only one feasible path offers a way out.

Finally, the court appearance – and any subsequent conversation with the media – should conclude with the final message that bankruptcy is the only available path. And, smartly, expect him to soften this stark message by wrapping it in “personal blanket.” And that means he will tell the court that bankruptcy will provide solutions for the citizens of the city, who deserve to know what the city can provide. And he will hold out a promise of the city reinventing itself without the heavy weight of debt.

It has been more than three months since the governor’s letter. Don’t expect his key messages to have changed much.